10-K: Smart Sand Inc. Navigates Market Volatility with Strategic Growth and Diversification in 2024

Smart Sand Inc. reports its 2024 performance, highlighting strategic initiatives to diversify its customer base and expand its logistics infrastructure amidst fluctuating market conditions.

Summary

• Smart Sand Inc. is a fully integrated frac and industrial sand supply and services company.
• The company produces low-cost, high-quality Northern White sand for hydraulic fracturing and industrial applications.
• In 2024, North America proppant demand increased by 7% compared to 2023.
• The company is diversifying its customer base to include Industrial Product Solutions (IPS).
• Smart Sand operates three frac sand mines and related processing facilities in Oakdale, Wisconsin; Ottawa, Illinois; and Blair, Wisconsin.
• The company directly controls five in-basin transloading facilities and has access to third-party transloading terminals.
• In late 2023 and early 2024, Smart Sand acquired rights to operate transloading facilities in Minerva, Ohio, and Dennison, Ohio.
• The company offers wellsite proppant handling solutions services and equipment under flexible contract terms custom tailored to meet the needs of our customers.
• The company expects 2025 capital expenditures to be between $13.0 million and $17.0 million.
• As of December 31, 2024, the company had cash on hand of $1.6 million and undrawn availability under the FCB ABL Credit Facility of $30.0 million.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. While revenue increased and strategic initiatives are underway, net income decreased and the company faces numerous risks related to market conditions and regulations.

Positives

• The company is diversifying its customer base to include Industrial Product Solutions (IPS).
• The company has access to four Class I rail lines.
• The company has an experienced management team.
• The company focuses on safety and environmental stewardship.
• The company has long-term liquidity and financial flexibility.
• The company has long-lived, strategically located, high-quality reserve base.
• The company has intrinsic logistics advantage.
• The company has expanded logistics solutions.

Negatives

• The company's business and financial performance depend on the level of activity in the oil and natural gas industry.
• A material portion of the company's revenues have been generated from sales with a limited number of customers.
• The company is exposed to the credit risk of its customers.
• The company faces significant competition that may cause it to lose market share.
• The company may be required to make substantial capital expenditures to maintain and grow its asset base.
• The company's operations are subject to operational hazards and unforeseen interruptions for which it may not be adequately insured.
• The company's production process consumes large amounts of natural gas and electricity.
• The company's operations are dependent on its rights and ability to mine its properties and on its having renewed or received the required permits and approvals from governmental authorities and other third parties.

Risks

• Fluctuations in demand for frac sand.
• The cyclical nature of customers' businesses.
• Operating risks beyond the company's control.
• Dependence on the Oakdale mine and processing facility.
• Decreased usage of rail terminals.
• Development of alternative proppants or new processes.
• Increased competition from new or existing sources of sand supply.
• Legislative and regulatory initiatives relating to hydraulic fracturing.
• Potential negative litigation outcomes.
• Scarcity of supplies necessary to run the business.
• Barriers to entry in the industrial sand market.
• Actions by OPEC and/or Russia.
• Ability to mine properties and process sand and renewal of permits.
• Ability to compete in the sand or proppant delivery markets.
• Loss of business from largest customers.
• Increasing costs or lack of dependability of transportation services.
• Increases in prices of energy sources.
• Loss of or diminished access to water.
• Ability to complete acquisitions or integrate acquired businesses.
• Ability to protect intellectual property rights.
• Ability to make capital expenditures and obtain financing.
• Restrictions imposed by indebtedness.
• Border restrictions.
• Global pandemics.
• New or increased tariffs.
• Contractual obligations to deliver minimum amounts of frac sand.
• Accuracy of estimates of mineral reserves and resource deposits.
• Shortage of skilled labor and rising costs.
• Ability to attract and retain key personnel.
• Ability to maintain satisfactory labor relations.
• Ability to maintain effective quality control systems.
• Seasonal and severe weather conditions.
• Results of political and civil unrest.
• Fluctuations in sales and results of operations due to seasonality.
• Interruptions or failures in information technology systems.
• Impact of international or domestic terrorism or armed conflict.
• Extensive and evolving environmental, mining, health and safety regulation.
• Silica-related health issues and litigation.
• Ability to acquire, maintain or renew financial assurances.
• Climate change legislation and regulatory initiatives.

Future Outlook

The company expects demand for frac sand in 2025 to remain at healthy levels, driven by increased lateral lengths and higher amounts of sand per well completed. The company also expects to expand its IPS business in 2025 and beyond.

Management Comments

• Management expects the demand for frac sand in 2025 to continue to be at healthy levels.
• Management believes higher demand driven by increased laterals and higher amounts of sand per well completed should lead to sand prices remaining relatively stable in 2025.
• Management expects the Bakken and Marcellus formations as well as the Montney and Douvernay shale basins in Canada to continue to be key markets for the company.

Industry Context

The proppant industry is highly competitive, with a mix of large national producers and smaller regional players. Consolidation activity has been significant in recent years. Demand for frac sand is closely linked to oil and natural gas prices and drilling activity.

Comparison to Industry Standards

• Competitors include Badger Mining Corporation, HC Minerals, Inc., Covia Holdings Corporation, U.S. Silica Holdings, Inc., Capital Sand Company, Source Energy Services and Solaris Energy Infrastructure, Inc.
• The company believes it is well-positioned competitively due to its low cost of sand production, low debt levels, logistics infrastructure, high-quality, balanced reserve profile and patented SmartSystems wellsite proppant storage solutions.
• The company's strategy of expanding its terminal network and diversifying into IPS aligns with industry trends of increasing efficiency and reducing reliance on the volatile oil and gas market.

Legal Proceedings

• The company may be subject to various legal proceedings, claims and governmental inspections, audits or investigations arising out of our operations in the normal course of business.
• Cory Berg, et al. v. Hi-Crush Blair LLC, LLC et al., Case No. 2019-cv-65, Trempealeau County, Wisconsin and Leland Drangstveit, et al. v. Hi-Crush Blair, LLC, et al., Case No. 2019-cv-66, Trempealeau County, Wisconsin are ongoing cases regarding negligence and nuisance claims against Blair and its subcontractors.

Stakeholder Impact

• The company's performance impacts shareholders through stock value and potential dividends.
• Employees are affected by the company's ability to provide stable employment and benefits.
• Customers benefit from the company's ability to provide reliable and cost-effective proppant solutions.
• Suppliers and creditors are impacted by the company's financial stability and ability to meet its obligations.
• Communities in which the company operates are affected by the company's environmental practices and community involvement.

Next Steps

• Continue pursuing opportunities to maximize the value and the utilization of the Oakdale, Ottawa, and Blair facilities through the addition of new customers and increased sales volumes.
• Continue to focus on shorter term contracts and increase sales in the spot market.
• Continue evaluating ways to reduce the landed cost of products in-basin and to the wellsite for customers while increasing customized service offerings.

Key Dates

Keywords

frac sand, industrial sand, proppant, logistics, mining, Northern White sand, SmartSystems, oil and gas, reserves, transloading, rail, Oakdale, Ottawa, Blair, IPS